Over the last 24 hours there have been a number of blogs posted in relation to the 2008 Budget announcement – on both SME Plus blog and our sister blog Tax Plus blog.

For your reference and convenience please find below a list of the respective blogs posted:

SME Plus

Budget 2008 - Pension Tax Relief
Budget 2008 - Capital Allowances
Budget 2008 - Enterprise management incentives ("EMI") share options
Budget 2008 - VAT
Budget 2008 - Trade losses for individuals...
Budget 2008 - Pensions
Budget 2008 - Associated companies
Budget 2008 - ISAs
Budget 2008 - Income shifting
Budget 2008 - Corporation tax simplification...
Budget 2008 - Enterprise Investment Scheme
Budget 2008 - Previously announced

Tax Plus

Budget 2008 - All Settled Offshore?
Budget 2008 - The Remittance Basis - Offshore Mortgages
Budget 2008 - Non Doms and Capital Losses
Budget 2008 - Personal allowances and the remittance basis
Budget 2008 - Non Doms and the £30,000 charge for the remittance basis
Budget 2008 - VAT
Budget 2008 - Changes to taxation of foreign dividends
Budget 2008 - Relaxation on Residence Test and Day Counting Rules

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The previously announced reduction in basic rate income tax from 22% to 20% from 6th April created concerns for 2 sectors.

Firstly, charities were concerned that they would lose out because Gift Aid donations would only benefit from 20% income tax relief with a resulting reduction in the gross donation.

Secondly individuals making personal pension contributions would only benefit from 20% tax relief at source instead of 22%. For instance a personal pension contribution of £78 would be worth £100 after basic rate tax relief in 2007/08. After 6th April the same £78 contribution becomes £97.50 after basic rate tax relief. This represents a small but significant reduction in your pension fund. Higher rate tax payers can claim back a further 20% through self assessment, increased from the previous 18% but the gross pension premium is still reduced for the same initial investment.

It was pleasing to see the Chancellor act on the concerns of charities and add 2% relief to Gift Aid donations for a transitional period.

It was a shame that the same generosity was not extended to the millions of us trying to save for our retirement.

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Although most of the changes on capital allowances have been known about for several months, there are a couple of minor tweaks announced today.

• The 100% first year allowance on cars with very low CO2 emissions will continue for an additional five years, until 31 March 2013, but the qualifying emissions threshold will be reduced from 120g/km to 110g/km driven 
•  Small balances left on capital allowances pools will be able to be written off where the balance has been reduced to £1,000
  

In addition, there is confirmation of new rules to allow companies (not unincorporated businesses) to surrender losses in return for a cash repayment from HMRC. This will apply to losses created by claims to 100% first year allowances on certain energy-saving or environmentally-beneficial plant & machinery, It will not be available where those losses could be used in some other way, for example against other taxable income or surrendered as group relief.

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Companies thinking of offering EMI share options to employees will have three new factors to consider: 

•  the market value (at the date of grant) of the shares covered by the option is to increase to £120,000; 
• the company offering the option must have fewer than 250 employees; and
• new restrictions are being placed on the company’s activities.
  

The last of these is unlikely to affect most companies (as shipbuilding, coal and steel production tend not to be that prevalent in the SME market) but the first two are potentially of greater relevance.

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The main VAT changes announced in the Budget today are;

1. With effect from 1 April 2008, the annual VAT Registration/deregistration limits have
   increased to £67,000/£65,000 respectively. 
2. Revised fuel scale charges will apply for VAT return periods beginning after 1 May 2008.
3. A transitional period has been announced for VAT refund claims to 31 March 2009. This follows recent litigation relating to the three year capping rules introduced in 1996/7.
4. Withdrawal of the staff hire concession with effect from 1 April 2009.
5. A package of simplification measures for the option to tax.
6. Extension of the VAT exemption for fund management services.
7. The limits for correcting errors on VAT returns have increased from £2,000 to the greater of £10,000 and 1% of turnover.
   
   Full details of these changes will be contained in our Budget Tax Bulletin to be issued shortly.
   
   

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... are being restricted for tax purposes. At present an individual who carries on a trade, on however part-time a basis, can, subject to certain detailed restrictions, set this loss off against other income and gains. Anti-avoidance legislation introduced in the 2007 Finance Act restricted the offset of tax losses for non-active or limited partners. In the Revenue’s view this merely resulted in individuals entering into loss-making trades on a sole trader basis purely for the tax relief on the losses. As a result this legislation is being introduced with effect from 12 March 2008 for individuals who spend less than ten hours a week on a sole trader activity; for existing trades the loss relief is restricted to £25,000 pa and for new trades, where tax avoidance is a motive, offset relief is abolished.

This is clearly designed to counter the sale of certain investment products that relied on tax losses as part-funding. However, they may well affect other genuine arrangements that “just happen” to meet the tests.

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There appear to be no dramatic new announcements relating to pension planning in this budget. As previously announced the annual allowance increases to £235,000 for 2008/09. The lifetime allowance becomes £1,650,000.

Individuals who have not reviewed their pension arrangements since the 2006 'Pension Simplification' should do so now. In particular transitional protection against the effects of the lifetime allowance can be applied for. The deadline for applying for this protection is 5th April 2009.

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When looking at whether companies are “associated”, the Revenue has historically been able to include the rights of people in partnership. This has meant that two companies, controlled by people in partnership – but with no other link to one another – could be treated as associated and find that their tax bills rose as a result.

With effect from 1 April 2008, the definition of common control will be revised, so that business partners will only be taken into account where “relevant tax planning arrangements” (put in place to reduce tax liabilities) are in place.

Further detail is awaited, but this presumably means that individuals in “genuine” partnerships will no longer have to include companies owned by their fellow partners when counting the number of associates for their own companies if there is no other commercial connection. If this proves to be the case, it will be a very welcome change.

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The budget confirmed previously announced increases to ISA allowances for 2008/09.  From 6th April individuals can contribute up to £7,200 in ISA. Of this up to £3,600 can be invested in cash. The remainder can be invested in Stocks and Shares. The old and confusing regime of Mini and Maxi ISAs will cease to exist after 5th April. Instead, the more appropriately labelled Cash ISA and Stocks and Shares ISA will be the terminology.

Individuals contributing the maximum amounts by direct debit may wish to review their arrangements.

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Legislation and consequently its introduction is being delayed for 12 months – party time!

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The 2008 budget included possible incentives for individual savers and investors at two opposite extremes of the market.

Firstly the announcement of more consultation on the Savings Gateway to encourage lower income individuals to save regularly in deposit accounts. This was originally consulted on in 2001 and has been trialed since. We shall wait and see whether a scheme whereby the government matches an individuals savings will actually be implemented.

Secondly the governments want to simplify the Enterprise Investment Scheme (EIS) to encourage investment in smaller, high-risk trading companies. These schemes allow an investor to benefit from 20% income tax relief as well as CGT deferral for reinvestments and gains free of CGT where income tax relief has applied. The government wants to increase the limit for income tax relief from £400,000 to £500,000 for 2008/09. This will be subject to State aid approval. In addition a consultation to try to encourage more investment is to be undertaken. This consultation will focus on various matters but will include how to increase awareness of these schemes amongst investors as well as the possibility of carrying back tax relief being extended to carry forward.

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…but don’t hold your breath; the proposals, when formulated, will only apply to companies with less than 10 employees and turnover under £750,000. This may not be quite what most SMEs were hoping for.

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The Chancellor has today announced an increase in the individual investor limit from £400,000 to £500,000 – subject to EU State Aid approval. The detailed tests for companies and investors otherwise appear to remain unchanged.

Whilst this is good news for companies seeking to raise funds – one word of warning. State Aid approval can take a long time to come through.

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Much of what will be included in this year’s Finance Bill was known long before the Chancellor stood up to make his Budget speech. The main items of relevance to businesses are summarised here, with links to earlier postings:-

• Corporation Tax – from 1 April 2008 the main rate will be reduced from 30% to 28% and the small companies’ rate increased from 20% to 21%. 
• Homes abroad owned through a company – removal of a benefit in kind tax charge where the company is owned by individuals and the sole activity of the company is to hold an overseas property for occupation by the individuals and/or letting. 
• Loss Relief – restriction of loss relief for interest payments made on certain qualifying loans in a partnership or a small company. Effective from 9 October 2007 this measure tackles a tax avoidance scheme which sought to advance the time at which relief could be claimed.
• CGT reform for individuals & trusts (not for companies) – abolition of indexation allowances and taper relief, and introduction of a flat rate of 18%, (subject to new entrepreneurs’ relief) from 6 April 2008.
• Research & Development – extension of SME tax relief schemes to include mid-sized companies with fewer than 500 employees.
• Company gains on life policies – to be brought within the loan relationship legislation.
• Capital Allowances – a range of new measures, including the reduction of annual writing down allowances to 20%, introduction of an Annual Investment Allowance of £50,000 and the reduction in the rate of allowances available for integral fixtures.
• Leased plant & machinery – changes to bring the proceeds of sale from finance leaseback arrangement into charge to tax, and other anti-avoidance changes to long funding lease rules.
  

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